Kerala direct selling act-Other states likely to follow suit

The Kerala government’s resolve to crack down on direct selling companies — such as Amway, Modicare and Oriflame, among others — through its proposed legislation could herald a trend among other states and hit the Rs 8,000 crore direct selling industry hard.

Some of the draft clauses in the proposed legislation intend to put a cap on the number of members each distributor can enrol. According to direct selling companies, membership enrollment is key to their business model, so the legislation may adversely impact their business fundamentals, forcing them to shut shop not only in Kerala but across the country as the state could flag its law to the Centre and other states for emulation.
It is in Kerala where Amway India’s CEO William Scott Pinckney and two of his directors were arrested by the Economic Offences Wing of the state crime branch on May 27 — to be let out on bail the following day — under the Prize Chits and Money Circulation Schemes (Banning) Act 1978. The move had come after several Amway customers and distributors in Kozhikode and Wayanad districts had sued the multinational company for alleged cheating.

Called the Kerala state multi-level marketing (control & regulation) Bill, 2013, it is currently under discussion between the state law department and the Indian Direct Selling Association (IDSA), sources said.

According to direct sellers and their industry body IDSA, some of the proposed changes, if adopted in the final draft of the Bill, are sufficient to demolish the entire direct selling business model which works on creating multiple members and multi-layered membership schemes.

“The fear is that the proposed legislation may also become the model law for the rest of the country. Once that happens, the concept of direct selling and multi-level marketing, which had a distributors’ base of 48.54 lakh in 2011-12, may virtually disappear,” said a senior executive in a leading direct selling company.

IDSA, which has 18 members — including Tupperware India, Oriflame, Hindustan Unilever Network, Max Life Insurance, Tianjin Tianshi, Herbal Life and Amway — has been lobbying with ministries such as finance, corporate affairs and consumer affairs to bring in clarity in the existing laws so as to protect legitimate direct sellers.

According to sources, Amway, Modicare, K-Link and DXN, among others, have already started winding up their Kerala operations. Estimates suggest that Kerala is generating around half of the R3,000 crore revenue that comes from all the southern states.

The proposed Bill, which is expected to be taken up for consideration by the Kerala cabinet soon, also spells out the creation of a state-level regulatory authority for direct sellers, mandatory registration of direct sellers and MLM companies and their agents, members and distributors, among a host of other provisions which have not found favour with the direct selling industry.

According to IDSA, the total distributor base is expected to reach over 80 lakh by 2014-15, when its turnover is expected to cross R10,000 crore. The IDSA has maintained they have been contributing to the nation’s economy by way of direct taxes. “Total tax paid by IDSA member companies amounted to R821.20 crore in 2011-12 as compared to R647 crore in 2010-11. And it will continue to grow as the business expands,” the association said.